Introduction
The most revealing comparison of the sustainability and performance of the two companies is the financial analysis based on the available annual reports. Firstly, it can show liquidity in the current moment and the background of general stability. Secondly, an in-depth study of critical financial relationships, cash flows, and profits enables the assessment of the organization’s profitability and its direction of operations in terms of further development. Analysis of stock prices on stock exchanges is a separate technique, but it is closely related to overall indicators of financial activity.
This report presents the calculation, evaluation, and interpretation of financial results for Kingfisher Plc and Travis Perkins Plc, followed by a critical comparison in terms of overall stability, performance, liquidity, and the attractiveness of investment options. The paper also provides a comparison of the two companies in terms of equity risk and return. Using monthly prices between March 2018 and March 2023, it presents the historical return and volatility of the two stocks and the estimate of the two stock’s betas based on their correlation with the FTSE 350 index.
Performance and Sustainability
Kingfisher Plc
Kingfisher Plc is a company that controls a chain of repair shops. They operate in the same industry as Travis Perkins Plc, so the nature of the valuation will include factors affecting the entire industry. The company was founded in 1982 and has maintained its position in the market ever since, following rapid growth that led to a long-term maintenance plateau (Macrotrends, 2023a). The annual financial statements are compared to those of the prior year, as well as management’s statements regarding future targets or changes.
An income statement analysis shows a downward trend compared to 2021/2022 in the short term. Looking at the longer term, however, Kingfisher Plc has been noticeably influenced by external factors in 2020, primarily driven by the coronavirus pandemic. The company reported a record-low net income in 2020, primarily due to significantly higher non-operating expenses and tax payments on the previous year’s earnings (Macrotrends, 2023a).
This fact suggests that the external crisis had a significant impact on the company’s financial performance in the short term, making it possible to return to pre-crisis levels and achieve growth only in 2022. This reliance on global determinants hurts an organization’s liquidity (Sakouvogui and Shaik, 2020). However, in this case, Kingfisher Plc maintained a current ratio above one without resorting to leverage during the crisis – the calculations and historical data are presented in Appendix A.
A negative signal in the 2022/2023 reporting period is a significant decrease in profitability. Operating and net income margins fell due to increased selling and distribution expenses, but not the cost of goods sold (Kingfisher Plc, 2023a). Consequently, with the remaining net sales values, prices for materials and raw materials remained approximately the same, which had a slight impact on the gross profit margin. Almost halving the net income compared to the previous year is primarily due to various factors that complicate distribution and development.
The reasons for this may include inflation, the geopolitical situation in Eastern Europe, rising transportation costs, and instability in the foreign exchange market (Feng and Fay, 2020; Lim et al., 2022). Given Kingfisher’s 2016 policy of unifying supply, which involves moving away from meeting the needs of local consumers at any given location, this dynamic demonstrates the unsustainability of this methodology (Du Preez, 2016). With the growth of online retailers being more versatile than Kingfisher Plc, this unification could be detrimental in the long run when entering other markets.
On the other hand, the company continues to invest in digital solutions, as indicated by the cash flow statement. Investing activities are growing in the 2022/2023 reporting period, despite declining net profit margins and related cash flow from operating activities (Kingfisher Plc, 2023a). Such a policy is the only true one when planning the long-term growth of a large company; however, it can be successful only if the direction set by the management is correctly chosen.
On the one hand, the unification of the offer contributes to vertical integration, which, along with improved customer communication and quality service, generally aligns with the company’s mission and vision. However, with all the benefits of improving flexibility and adaptability in the face of a growing threat of external factors, such an approach is risky against the backdrop of diversification of the offer by larger universal players like Amazon. Kingfisher Plc is a retailer first and foremost, and even significant investments in digital solutions will always lag behind the pioneers who started their journey in the IT industry. Accordingly, given long-term sales and balance sheet dynamics, Kingfisher may continue to lose its audience if it does not adapt, introduce new competitive offerings, or enter promising markets. The company’s plateau reached in the 2000s shows only a slight increase in key indicators of net and operating profit margins, indicating untapped optimization potential (Macrotrends, 2023a).
On the other hand, despite various crises, the retailer maintains its position and stability in liquidity and solvency, keeping the percentage of the capital structure in its favor. In this case, there are several potential implications: choosing the proper integration into new markets to increase sales and opportunities for vertical growth, or creating a competitive offer by changing the development policy while maintaining the advantages of a unified approach. Kingfisher operates only in European countries that are currently experiencing a crisis due to the geopolitical situation in the eastern region, which is why it faces logistics challenges and limited opportunities for state support of its business (Lim et al., 2022). Against the backdrop of the complex conditions for conducting cooperation due to Brexit and the corresponding currency fluctuations, Kingfisher is unlikely to reach new heights under the current circumstances. The plateau risks lasting for many years, and rising operating costs will only exacerbate the financial situation.
Travis Perkins Plc
Travis Perkins Plc was founded later than Kingfisher in 1988. Their turnover is generally smaller, but changes in the long term are more dynamic (Macrotrends, 2023b). In 2018 and 2020, the company reported a negative net profit, a result that had not been seen in any previous year. However, the company’s comeback in the following years was marked by record net and operating profit margins, with net sales trending downward (Travis Perkins Plc, 2023a). Although these indicators declined again in 2022, the company has generally stabilized its market position, and only a few external factors still pose threats similar to those experienced in 2018 and 2020.
At the same time, the retailer maintains a high level of liquidity, despite all the jumps in the income statement. Long-term debt declines noticeably on balance sheets faster than assets fall (Travis Perkins Plc, 2023a). Therefore, against the backdrop of potential deviations in profitability optimization, Travis Perkins Plc remains more than stable in the long term, offset by efficient asset management.
The company is steadily reducing inventories, which increases the turnover rate, which is critical for retailers (Macrotrends, 2023b). The current assets are maintained at the same level, including those required to calculate the quick ratio, such as cash on hand and accounts receivable. Although the company’s capital structure often favors debt capital, its lending attitude is exemplary and of high quality.
Travis Perkins Plc also operates in the European market. However, their presence is currently insignificant compared to Kingfisher Plc. The decline in sales and assets may result from reorganizing expenses to obtain a better ratio of net income to sales or maintain liquidity. On the one hand, in any case, the downward dynamics is a negative sign for both investors and potential managers. On the other hand, such a responsible attitude protects against potential risks of external factors, described above, using the example of Kingfisher Plc.
An analysis of the cash flow statement reveals that the company continues to invest in property, plant, and equipment, as well as intangible assets, including computer software. Against the backdrop of short-term growth dynamics in cash generated from operations, the current situation presents opportunities for potential development. However, growing interest costs cut this perspective. Consequently, Travis Perkins Plc is exhibiting a relatively volatile operating cost performance amid a plateau in net sales, but continues to develop vertically.
This approach exemplifies a responsible attitude towards long-term investors. The company has a large margin of financial safety, thanks to its assets and declining liabilities. However, against the backdrop of all the drops in key indicators, the current ratio has approached one in terms of liquidity.
Further development largely depends on Travis Perkins Plc’s ability to operate in the increasingly complex conditions that are becoming more challenging due to external factors, as there are currently no prerequisites for maintaining a plateau or even increasing sales. Despite a small presence at the moment, the potential of the European market is fading against the backdrop of the current crisis, and access to distant, promising markets is complicated by logistical obstacles.
However, the practice of Travis Perkins Plc’s approach has many advantages. Firstly, high solvency rates with a dominant borrowed part of the capital structure. Secondly, a stable reduction in the duration of accounts receivable and inventory turnover is a key strength for the retailer. As a result, maintaining this policy requires optimizing operations in the new environment, particularly as transportation costs rise. On the one hand, such decisions are possible, given the company’s stock of long-term assets and relatively stable prices for raw materials. On the other hand, delay risks promise a loss of market share to competitors who, due to diversification and greater financial leverage, can better and faster adapt to new conditions.
Comparison and Options
A general picture of the comparison of critical indicators for the current year is shown in Figure 1. Both companies are equally vulnerable to external threats and are experiencing a plateau in net sales. Kingfisher Plc relies on equity and is more stable in liquidity than Travis Perkins Plc. Travis Perkins’s solvency is likely to improve in the long term; however, the current dynamics suggest that key profitability indicators are declining. Kingfisher is more stable, as it does not allow negative net income and is currently demonstrating sales growth.
The potential of both companies is currently limited by the European market, which is going through difficult times. Travis Perkins Plc has more prospects for expansion, but this organization has less quick financial capacity to launch large projects. Considering that, in general, Kingfisher Plc has a higher capitalization and more experience, from the perspective of the future head, Kingfisher is a priority option for development. On the other hand, Travis Perkins Plc, despite experiencing significant deviations in the income statement, is a more stable player due to its favorable ratio of long-term assets to liabilities and an optimized approach to inventory turnover and accounts receivable. These practices are essential for the retailer, but the current situation suggests that this advantage remains the only one Travis Perkins has over Kingfisher.
The social and environmental responsibility policies of both companies are at a reasonably high level. Comprehensive approaches to environmental conservation are an integral part of annual reports, which include waste management, reduction of carbon emissions, and becoming forest-positive (Kingfisher Plc, 2023b; Travis Perkins Plc, 2023b). These areas often require constant optimization of operating costs, which, due to the transition to renewable sources of raw materials, require high costs. Given that operating margins are not decisive for either company, meeting reported targets mainly depends on higher profitability for Kingfisher Plc.
However, in addition to a company’s financial position, its state in the stock market and related indicators should also be taken into account. Since the post of director includes access to options, short- and long-term stock price performance can also play a decisive role. The long-term position of Kingfisher Plc currently suggests a range of price increases to levels reached in winter 2023 (Kingfisher Plc, 2023c). At the same time, the maximum potential is almost one and a half times more, which was reached in the summer of 2021 (Kingfisher Plc, 2023c).
Similar dynamics can be observed in Travis Perkins Plc, whose share price is significantly higher than that of Kingfisher Plc (London South East, 2023). The peak rises and falls during the same periods, a characteristic of the entire industry’s dynamics, as shown in Figures 2 and 3.
Considering that both companies demonstrate growth during the month, it is expected to be maintained by the construction season and repairs until September. If the options are monthly, such an offer is profitable in any case. It will depend on the percentage of potential margin that Travis Perkins has due to higher share prices and, accordingly, better dynamics. More extended options will partly depend on the company’s internal processes; however, the upward trend may continue until winter, as indicated by historical charts (London South East, 2023).
One of the critical factors here will be liquidity adjustment – Kingfisher Plc is reducing liabilities in line with the decrease in current assets, while Travis Perkins Plc is showing an increase in liabilities amid falling assets. This signal may speak in favor of Kingfisher – investors will be more confident in quoting stocks with the potential for an increase in EPS rather than a fall.
Therefore, weighing all the potential risks in the short term, it is preferable to choose Kingfisher Plc options, which potentially indicate the possibility of longer-term growth and, accordingly, a higher return to the investor, than Travis Perkins Plc. Both companies are in a local bull market, characterized by industry growth. However, the financials speak in favor of Kingfisher Plc due to its stability and ability to maintain sales levels, despite the crisis factors, in contrast to Travis Perkins Plc, which demonstrates a decline. In many ways, the long-term attractiveness of options will require comprehensive internal optimization solutions initiated by management.
Return on Equity
Risk
The five-year calculated share-price volatility is 9.09% for Kingfisher Plc and 10.31% for Travis Perkins Plc. The data were collected from historical figures on the Yahoo Finance portal (Yahoo Finance, 2023a, 2023b). Critical value calculations and raw data are provided in Appendix B. The betas for these companies are 2.18 and 2.48 for Kingfisher Plc and Travis Perkins Plc, respectively. These measures measure the systematic risk associated with changes in the entire market and show the level of deviation from these dynamics in the case of a beta indicator. Volatility indicates the value of how stock prices change over a given period, regardless of changes in the market. Therefore, this indicator reflects unsystematic risk. As a result, these metrics provide a comprehensive picture of a given stock’s return risk. The greater the volatility, the riskier the investment is in terms of the company’s specific processes. The more significant the beta, the greater the risk that the organization’s activity will deviate from the market. In this case, Travis Perkins could generate a higher return due to the higher price per share, but on both measures, this investment is riskier than Kingfisher, although both values are high relative to the market.
Beta
Differences in the betas of two firms in the same industry can be attributed to various reasons; however, capital structure is a vital factor. Previous analysis shows that Kingfisher Plc has a higher equity-to-debt ratio, whereas more than half of this indicator for Travis Perkins Plc is comprised of loan commitments. Additionally, profitability also has a certain weight in beta formation: Kingfisher is already known to perform better financially than Travis Perkins (Putri and Rahyuda, 2020). Finally, assets, infrastructure, and, as a consequence of the first reason, financial leverage also affect beta. Kingfisher has a large capitalization in general, and it has considerable assets and leverage due to its structure, which favors equity. Therefore, the overall volatility is a consequence not only of the movements of the industry’s determinants but also of the company’s internal processes. As a result, the financials analyzed in the previous analysis favor Kingfisher Plc over Travis Perkins Plc, as reflected in the stock’s calculated beta and volatility values over the past five years. Although both companies deviate significantly from the market, since the beta is noticeably higher than one in both cases, Kingfisher Plc poses less risk for the investor.
Rate of Return
With this risk-free rate of return of 0.4%, the required rate of return estimated by the CAPM model is naturally higher for Travis Perkins Plc due to the more extensive beta. The higher this indicator, the greater the risk associated with the investment; however, in some cases, it can also yield a better return. In the case of Kingfisher Plc, this value is 8.806%, while that of Travis Perkins Plc is 9.937%. This fact means that an investment in Kingfisher Plc shares carries a lower risk than that of a competitor, but it is still relatively high compared to the entire market.
This indicator is directly related to the average return, which is calculated by taking the arithmetic mean of all monthly returns over five years. The average shows how much stock prices have increased or decreased over a given period, while beta, a variable in the CAPM model, considers the spread of deviations from the average price relative to the market. Consequently, the investor could earn less on Kingfisher Plc shares in five years. However, their deviations were less than those of Travis Perkins Plc. In the pessimistic scenario of losing cash assets, the investor should bet on Kingfisher Plc when diversifying the portfolio to preserve at least some of them. At the same time, in the best scenario, Travis Perkins Plc can bring in more money on the difference. However, it is challenging to catch the right moment due to high beta values, which makes it impossible to make the right decision in advance based on market deviations.
Predictions
Since beta measures volatility relative to the market, these companies’ stocks are at least twice as dynamic in changes as the selected FTSE 350 index. Estimating future deviations and entropy is challenging without a thorough examination of companies’ internal processes. The direction of change at a high beta often does not coincide with the market’s movement – if stocks grow in an industry, it is far from certain that this growth will be repeated in the same organization. Therefore, choosing a less risky option, such as Kingfisher Plc, is recommended. This is because, relative to the index, both stocks are relatively volatile, and the differences between them are minor compared to a similar ratio indicated by a beta. The required rate of return differs by only 1.1%; Kingfisher Plc can also bring significant income to the investor, provided that the dynamics are understood. Considering other financial indicators, this company is more stable with a larger capitalization and a more reliable capital structure. At the same time, there is a significant share price difference in favor of Travis Perkins Plc. This competitor may be preferred if the investor is willing to take on high risks, as the company has the advantage of being responsible for long-term debt capital.
Conclusion
Kingfisher Plc is a preferred employer due to its stronger financial position. While Travis Perkins Plc benefits from asset optimization approaches and long-term stability on the balance sheet, external threats already contribute to low profitability and reduced liquidity, which could be a critical determinant of whether the company remains competitive or loses market share. Kingfisher Plc has more development opportunities and better experience in digitalizing internal processes.
Given the presence of financial leverage in favor of equity, it has more stable EPS, and as a result, it is more attractive to investors. In terms of short-term options, Travis Perkins Plc could provide the best return, all other things being equal, due to the industry’s uptrend during this period. However, Kingfisher Plc has a more symmetrical situation with more potential for growth at historical highs.
Reference List
Du Preez, D. (2016) ‘Kingfisher announces huge digital investments and appoints ex-Amazon director‘, Diginomica.
Feng, C., and Fay, S. (2020) ‘Store closings and retailer profitability: A contingency perspective‘, Journal of Retailing, 96(3), pp. 411-433.
Kingfisher Plc. (2023a) ‘Full year results 2022/2023’.
Kingfisher Plc. (2023b) ‘Responsible Business‘.
Kingfisher Plc. (2023c). ‘Charting & comparison’.
Lim, W. M., et al. (2022) ‘What is at stake in a war? A prospective evaluation of the Ukraine and Russia conflict for business and society‘, Global Business and Organizational Excellence, 41(6), 23-36.
London South East. (2023). ‘Travis Perkins Historical Charts (TPK)’.
Macrotrends. (2023a) ‘Kingfisher Income Statement 2009-2023 | KGFHY’.
Macrotrends. (2023b) ‘Travis Perkins Income Statement 2011-2023 | TVPKF’.
Putri, I. G. A. P. T., and Rahyuda, H. (2020) ‘Effect of capital structure and sales growth on firm value with profitability as mediation’, International Research Journal of Management, IT and Social Sciences, 7(1), pp. 145-155.
Sakouvogui, K., and Shaik, S. (2020) ‘Impact of financial liquidity and solvency on cost efficiency: evidence from US banking system‘, Studies in Economics and Finance, 37(2), pp. 391-410.
Travis Perkins Plc. (2023a). ‘Annual Report 2022‘.
Travis Perkins Plc. (2023b). ‘Our Approach’.
Yahoo Finance. (2023a). ‘Kingfisher plc (KGF.L)’.
Yahoo Finance. (2023b). ‘Travis Perkins plc (TPK.L)’.
Appendix A
Table A1. – Financial Ratios Calculations for both Companies for 2022
Appendix B
